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STAG > SEC Filings for STAG > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for STAG INDUSTRIAL, INC.

Form 10-Q for STAG INDUSTRIAL, INC.


6-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

You should read the following discussion with the financial statements and related notes included elsewhere in Item 1 of this report and the audited financial statements as of December 31, 2013, and related notes thereto included in our most recent Annual Report on Form 10-K.

As used herein, "Company," "we," "our" and "us," refer to STAG Industrial, Inc. and our consolidated subsidiaries and partnerships, except where the context otherwise requires. The consolidated financial statements for the three and six months ended June 30, 2014 and June 30, 2013 include the financial information of the Company, STAG Industrial Operating Partnership, L.P. ("operating partnership") and our subsidiaries.

Forward-Looking Statements

This report contains "forward-looking statements" within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). You can identify forward-looking statements by the use of words such as "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "seeks," "should," "will," and variations of such words or similar expressions. Forward-looking statements in this report include, among others, statements about our future financial condition, results of operations, our business strategy and objectives, including our acquisition strategy, occupancy and leasing rates and trends, and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward-looking statements. Furthermore, actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and factors including, without limitation:

the factors included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission ("SEC") on February 26, 2014, including those set forth under the headings "Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations;"

the competitive environment in which we operate;

real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;

decreased rental rates or increasing vacancy rates;

potential defaults on or non-renewal of leases by tenants;

potential bankruptcy or insolvency of tenants;

acquisition risks, including failure of such acquisitions to perform in accordance with projections;

the timing of acquisitions and dispositions;

potential natural disasters;

international, national, regional and local economic conditions;


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the general level of interest rates;

potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or real estate investment trust ("REIT") tax laws, and potential increases in real property tax rates;

financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all;

credit risk in the event of non-performance by the counterparties to the interest rate swaps;

lack of or insufficient amounts of insurance;

our failure to complete acquisitions;

our failure to successfully integrate acquired buildings;

our ability to maintain our qualification as a REIT;

our ability to maintain key personnel;

litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and

possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of buildings presently owned or previously owned by us.

Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are an industrial real estate operating company focused on the acquisition and management of single-tenant industrial properties throughout the United States.

As of June 30, 2014, we owned 221 buildings in 34 states with approximately 41.2 million square feet, consisting of 153 warehouse/distribution buildings, 48 light manufacturing buildings and 20 flex/office buildings. We also owned two vacant land parcels adjacent to two of our buildings. Our buildings were 94.5% leased to 202 tenants, with no single tenant accounting for more than 2.6% of our total annualized rent and no single industry accounting for more than 13.0% of our total annualized rent, as of June 30, 2014. As used herein, the definition of annualized rent is the contractual monthly base rent as of June 30, 2014 multiplied by 12. If a tenant is in a free rent period as of June 30, 2014, the annualized rent is calculated based on the first contractual monthly base rent amount multiplied by 12.

We were formed as a Maryland corporation on July 21, 2010 and our operating partnership, of which we, through our wholly owned subsidiary, STAG Industrial GP, LLC, are the sole general partner, was formed as a Delaware limited partnership on December 21, 2009. On April 20, 2011, we completed our formation transactions and became a public company. At June 30, 2014, we owned a 96.48% limited partnership interest in our operating partnership. We are organized and conduct our operations to qualify as a REIT under the Code, and generally are not subject to federal income tax to the extent we distribute our income to our stockholders and maintain our qualification as a REIT.

Factors That May Influence Future Results of Operations

Outlook

The lack of speculative development in our markets may improve occupancy levels and rental rates in our owned portfolio. In addition, our acquisition activity is expected to enhance our overall financial performance. The continuation of low interest rates combined with the availability of attractively priced properties should allow us to continue to deploy our capital on an attractive "spread investing" basis. In general, the economic environment for our tenants appears to be improving due in particular to the increasing availability of financing accessible by mid-sized companies. Additionally, based on various real estate publications, the


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outlook for the industrial real estate sector is positive as the U.S. economy continues to improve and as retailers and manufacturers have made the shortening of the supply chain their top priority for the foreseeable future.

Rental Revenue

We receive income primarily from rental revenue from our buildings. The amount of rental revenue generated by the buildings in our portfolio depends principally on occupancy and rental rates. As of June 30, 2014, our buildings were approximately 94.5% leased. The amount of rental revenue generated by us also depends on our ability to maintain or increase rental rates at our buildings. Future economic downturns or regional downturns affecting our submarkets that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our buildings.

Certain leases entered into by us contain tenant concessions. Any such rental concessions are accounted for on a straight line basis over the term of the lease.

The following table provides a summary of our leasing activity for the three and six months ended June 30, 2014. As of June 30, 2014, we owned 221 buildings with approximately 41.2 million square feet. The table does not include month to month leases or leases with terms less than 12 months.

                     Number of    Square Feet       Net Effective                                Weighted        Turnover Costs
                      Leases        Signed             Rent Per              GAAP Basis        Average Lease       Per Square
                      Signed      (in 000's)      Square Foot (1)(2)     Rent Growth (1)(3)      Term (4)           Foot (5)
Three months
ended June 30,
2014
New Leases                   1        204,952    $               3.68                  13.6 %            3.2    $           0.71
Renewal Leases               6        506,432    $               4.83                  10.7 %            2.0    $           0.21
Total / Weighted
Average                      7        711,384    $               4.50                  11.3 %            2.3    $           0.35
Six months ended
June 30, 2014
New Leases                   4        300,352    $               2.51                  13.6 %            3.9    $           0.70
Renewal Leases              11      1,505,974    $               3.54                  11.0 %            3.1    $           0.24
Total / Weighted
Average                     15      1,806,326    $               3.37                  11.3 %            3.3    $           0.32



(1) New leases where there were no prior comparable leases, due to extended downtime or materially different lease structures are excluded.

(2) Net effective rent is the average net rent calculated in accordance with GAAP, over the term of the lease.

(3) GAAP basis rent growth is a ratio of the change in net effective rent (on a GAAP basis, including straight-line rent adjustments as required by GAAP) compared to the net effective rent (on a GAAP basis) of the comparable lease.

(4) The lease term is expressed in years. Assumes no exercise of lease renewal option, if any.

(5) Turnover costs are comprised of the costs incurred or capitalized for improvements of vacant and renewal spaces, as well as the commissions paid and costs capitalized for leasing transactions. Turnover costs per square foot represent the total turnover costs expected to be incurred on the leases signed during the period and do not reflect actual expenditures for the period.

During the three and six months ended June 30, 2014, of the new leases signed, one lease for 0.2 million square feet included free rent totaling $47 thousand. Additionally, during the three and six months ended June 30, 2014, none of the renewal leases signed had free rent periods during the lease terms.


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Scheduled Lease Expirations

Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets and by the desirability of our individual buildings. As of June 30, 2014, leases which comprise approximately 2.7% percent of our annualized base rent are scheduled to expire during the remainder of 2014. With the change in rental rates in our markets over the past few years, as the leases which comprise approximately 2.7% of our annualized base rent expire in 2014, assuming no further changes in current market rental rates after considering a 12 to 24 month downtime, we expect that the rental rates on the respective new leases will generally be lower than the rates currently being paid, thereby resulting in less revenue from the same space. As a result of the above factors, our future earnings and cash flows may be negatively impacted by current market conditions affecting our properties.

As of June 30, 2014, we had approximately 2.3 million rentable square feet of currently available space in our buildings. Of the 0.8 million square feet and 1.7 million square feet of leases that have expired during the three and six months ended June 30, 2014, respectively, we have renewed 0.3 million square feet and 1.0 million square feet of leases, respectively, resulting in a 35.1% and 55.7% tenant retention rate for the three months and six months ended June 30, 2014, respectively. The 0.8 million square feet and 1.7 million square feet of expiring leases during the three and six months ended June 30, 2014 represented only 2% and 4%, respectively, of the 41.2 million square feet in our 221 buildings as of June 30, 2014. As of June 30, 2014, for the period July 1, 2014 through June 30, 2015, only one of our top ten leases based on June 30, 2014 annualized revenue will be expiring. This lease is scheduled to expire on December 31, 2014, and our leasing team has been in preliminary discussions on possible renewals for this tenant.

Conditions in Our Markets

The buildings in our portfolio are located in markets throughout the United States. Positive or negative changes in economic or other conditions, adverse weather conditions and natural disasters in these markets may affect our overall performance.

Rental Expenses

Our rental expenses generally consist of utilities, real estate taxes, management fees, insurance and site repair and maintenance costs. For the majority of our tenants, our rental expenses are controlled, in part, by the triple net provisions in tenant leases. In our triple net leases, the tenant is responsible for all aspects of and costs related to the building and its operation during the lease term, including utilities, taxes, insurance and maintenance costs. However, we also have modified gross leases and gross leases in our building portfolio. The terms of those leases vary and on some occasions we may absorb building related expenses of our tenants. In our modified gross leases, we are responsible for some building related expenses during the lease term, but the cost of most of the expenses is passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all aspects of and costs related to the building and its operation during the lease term. Our overall performance will be affected by the extent to which we are able to pass-through rental expenses to our tenants.

Results of Operations

The following discussion of our results of operations should be read in conjunction with the consolidated financial statements and the accompanying footnotes. We consider our same store (as defined below) portfolio to consist of only those buildings owned and operated at the beginning and at the end of both of the applicable periods presented. Same store results are considered to be useful to investors in evaluating our performance because they provide information relating to changes in building-level operating performance without taking into account the effects of acquisitions or dispositions.

Comparison of three months ended June 30, 2014 to the three months ended June 30, 2013

Our results of operations are affected by the acquisition and disposition activity during the 2014 and 2013 periods as described below. On April 1, 2013, we owned 179 buildings including 119 warehouse/distribution buildings, 39 light manufacturing buildings and 21 flex/office buildings. Subsequent to April 1, 2013, we sold three buildings for which the results of operations are included in disposition or loss from discontinued operations and in the table below are not considered part of our same store portfolio. Therefore, there are 176 buildings which are considered our same store portfolio ("three month same store") in the analysis below. Three month same store occupancy decreased 0.7% to 92.9% as of June 30, 2014 compared to 93.6% as of June 30, 2013. The results of operations from acquisitions relates to the 45 buildings acquired after April 1, 2013 for an aggregate cost of approximately $400.7 million.


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The following table summarizes selected operating information for our three month same store portfolio and our total portfolio for the three months ended June 30, 2014 and June 30, 2013 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the three months ended June 30, 2014 and June 30, 2013 with respect to the buildings acquired and disposed of after April 1, 2013. In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which prospectively changed the definition of a discontinued operation to the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. We early adopted the provision effective January 1, 2014. The Lexington, VA building that was sold on March 25, 2014 did not meet the definition of a discontinued operation under this new definition and is therefore included within dispositions in the table below. The results from buildings sold prior to January 1, 2014 are included in discontinued operations within the table below.

                                             Same Store Portfolio                                 Acquisitions                           Dispositions                                   Total Portfolio
                             Three months ended June 30,                                   Three months ended June 30,           Three months ended June 30,          Three months ended June 30,
                               2014               2013          Change     % Change         2014                2013              2014                 2013              2014              2013         Change     % Change

Revenue
Operating revenue
Rental income             $        26,645    $        27,073   $    (428 )      -1.6 % $         8,558     $         1,014   $            -       $            18   $       35,203    $       28,105   $   7,098        25.3 %
Tenant recoveries                   4,546              3,282       1,264        38.5 %           1,733                 194                -                     -            6,279             3,476       2,803        80.6 %
Other income (1)                       47                  7          40       571.4 %               2                   -                -                     -               49                 7          42       600.0 %
Total operating revenue            31,238             30,362         876         2.9 %          10,293               1,208                -                    18           41,531            31,588       9,943        31.5 %
Expenses
Operating expenses
Property                            2,692              2,267         425        18.7 %             502                  49                -                     -            3,194             2,316         878        37.9 %
Real estate taxes and
insurance                           3,796              3,048         748        24.5 %           1,616                 196                -                     -            5,412             3,244       2,168        66.8 %
Total operating
expenses                            6,488              5,315       1,173        22.1 %           2,118                 245                -                     -            8,606             5,560       3,046        54.8 %
Net operating income (2)  $        24,750    $        25,047   $    (297 )      -1.2 % $         8,175     $           963   $            -       $            18   $       32,925    $       26,028   $   6,897        26.5 %
Other expenses (income)

General and
administrative                                                                                                                                                               8,283             4,477       3,806        85.0 %
Asset management fees
income                                                                                                                                                                        (151 )            (255 )       104        40.8 %
Property acquisition
costs                                                                                                                                                                          688             1,269        (581 )     -45.8 %
Depreciation and
amortization                                                                                                                                                                20,769            16,244       4,525        27.9 %
Other expenses                                                                                                                                                                 193               161          32        19.9 %
Total other expenses
(income)                                                                                                                                                                    29,782            21,896       7,886        36.0 %
Total expenses                                                                                                                                                              38,388            27,456      10,932        39.8 %

Other income (expense)
Interest income                                                                                                                                                                  4                 3           1        33.3 %
Interest expense                                                                                                                                                            (5,813 )          (4,846 )      (967 )     -20.0 %
Offering costs                                                                                                                                                                   -               (27 )        27       100.0 %
Total other income
(expense)                                                                                                                                                                   (5,809 )          (4,870 )      (939 )      19.3 %
Discontinued operations

Income attributable to
discontinued operations                                                                                                                                                          -                90         (90 )    -100.0 %
Gain on sales of real
estate                                                                                                                                                                           -               464        (464 )    -100.0 %
Total income
attributable to
discontinued operations                                                                                                                                             $            -    $          554   $    (554 )    -100.0 %
Gain on sale of real
estate                                                                                                                                                              $            -    $            -   $       -         0.0 %
Net loss                                                                                                                                                            $       (2,666 )  $         (184 ) $  (2,482 )    1348.9 %
Less: loss attributable
to noncontrolling
interest after
preferred stock
dividends                                                                                                                                                                     (310 )            (357 )        47       -13.2 %
Net income (loss)
attributable to STAG
Industrial, Inc.                                                                                                                                                    $       (2,356 )  $          173   $  (2,529 )   -1461.8 %



(1) Other income excludes asset management fee income, which is included below in Other expenses (income) for purposes of calculating net operating income.

(2) Net operating income excludes the results of discontinued operations in the table above. For a detailed discussion of net operating income, including the reasons management believes net operating income is useful to investors, see "Non-GAAP Financial Measures" below.


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Same Store Total Operating Revenue

Same store operating revenue consists primarily of rental income from our properties, lease termination fees and tenant reimbursements for insurance, real estate taxes and certain other expenses.

Same store rental income consisting of base rent, termination income, straight-line rent and above and below market lease amortization decreased by $0.4 million or 1.6% to $26.6 million for the three months ended June 30, 2014 compared to $27.1 million for the three months ended June 30, 2013. Approximately $1.2 million of the change was primarily attributable to tenants downsizing their spaces and vacancies. These decreases were offset by $0.5 million of rental increases due primarily to tenant expansions and new leases. There was also a net increase of $0.1 million primarily related to changes in rental rates on lease renewals. Same store rental income also increased $0.1 million related to a decrease in amortization of net above market leases.

Same store tenant recoveries increased by $1.3 million or 38.5% to $4.5 million for the three months ended June 30, 2014 compared to $3.3 million for the three months ended June 30, 2013. The increase was primarily due to one building where we began paying the real estate taxes on behalf of a tenant that previously paid its taxes directly. As a result, we recognized approximately $0.9 million of tenant recovery income. Approximately $0.3 million of the increase related to a property where the tenant reimbursed us for deferred repair and maintenance that was necessary upon its vacating the space at lease expiration. Approximately $0.3 million of the increase related to several . . .

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